The following allocation method distributes overhead to revenue-generating departments based on a percentage of revenue or square footage:

• A. Direct method
• B. Step-down allocation method
• C. Simultaneous equations method
• D. Double distribution method

Answer: (B)

The key idea is allocating service department costs in a stepwise, practical way so that the overhead ends up assigned to the departments that generate revenue, using bases that reflect how much those departments actually use resources. In a step-down allocation, you start with a service department that provides the most support to others and allocate its costs to the remaining service departments and to operating (revenue-generating) departments in turn. The bases for these allocations—such as percentage of revenue or square footage—capture how much each department uses those shared services. By doing this in a sequence, each operating department ends up bearing a portion of overhead roughly proportional to its use of services, without needing to solve complex reciprocal relationships.

This approach sits between the simpler direct method and the full reciprocal (simultaneous equations) method. The direct method would allocate service costs straight to operating departments without considering inter-service transfers, and the full reciprocal method, while more precise, is more complex. The step-down method provides a practical balance, especially when bases like revenue or space reasonably reflect usage.